Record ARPU and Triple Play and Strong Free Cash Flow
LONDON, Aug. 6, 2009 (GLOBE NEWSWIRE) -- Virgin Media Inc. (Nasdaq:VMED) announces results for the quarter ended June 30, 2009.
Quarterly Highlights
Financial
* Consumer on-net(1) revenue increased 3.6% to GBP 617m (Q2-08: GBP
596m)
* Total revenue of GBP 936m (Q2-08: GBP 940m)
* OCF(2) of GBP 334m (Q2-08: GBP 334m)
* Operating income of GBP 15m (Q2-08: GBP 328m loss)
* Free Cash Flow(3) of GBP 85m (Q2-08: GBP 111m)
* Net cash provided by operating activities of GBP 236m (Q2-08: GBP
274m)
* Successfully raised $1.6bn equivalent in bonds in June and July to
prepay senior credit facilities
* Investigating a secondary listing on London Stock Exchange
Operational
* On-net ARPU increased 3.8% to record GBP 43.27 (Q2-08: GBP 41.68)
since merger
* On-net churn maintained at low level of 1.3% (Q2-08: 1.3%)
* Customers are buying more from us with RGUs(4) net increase of
95,700 (Q2-08: 136,800) to 12.65m (Q2-08: 12.04m)
* Record triple-play penetration of 58.3% (Q2-08: 53.1%)
On-net Broadband
* Broadband customer net increase of 5,100 (Q2-08: 54,600) to 3.74m
(Q2-08: 3.56m)
* New and existing customers are choosing faster broadband,
improving tier mix
* Broadband customers with 10Mb or higher increased 86%
year-on-year to 1.75m
* 47% year-on-year increase in aggregate headline speed
* 2Mb to 10Mb upgrade programme underway - 385,000 customers
upgraded to date
* 50Mb broadband roll-out complete; 200Mb customer pilot underway
Television
* TV customer net increase of 20,400 (Q2-08: 24,800) to 3.67m
(Q2-08: 3.54m)
* Video-on-demand (VOD) usage rises to 55% of digital customers
(Q2-08: 48%)
* Highest ever average VOD views of 62m per month (Q2-08: 38m)
Mobile
* Contract mobile customers net increase of 72,300 (Q2-08: 55,900)
to 784,600 (Q2-08: 491,600), up 60% year-on-year
(1) On-net: where consumer services are provided by the Company's
fiber optic cable network, as opposed to non-cable areas,
referred to as off-net.
(2) OCF: operating income before depreciation, amortization, goodwill
and intangible asset impairments and restructuring and other
charges. OCF is a non-GAAP financial measure. Please see Appendix
F for a reconciliation of non-GAAP financial measures to their
nearest GAAP equivalents.
(3) Free Cash Flow or FCF: operating income before depreciation,
amortization, goodwill and intangible asset impairments and
restructuring and other charges (OCF) reduced by purchase of
fixed and intangible assets, as reported in our statements of
cash flows, and net interest expense, as reported in our
statements of operations. FCF is a non-GAAP financial measure.
Please see Appendix F for a reconciliation of non-GAAP financial
measures to their nearest GAAP equivalents.
(4) Revenue Generating Unit or RGU: a contract for residential
broadband, TV, telephony or contract mobile services. A
triple-play customer is one household taking broadband, TV and
telephony, which equals three RGUs.
Neil Berkett, Chief Executive Officer of Virgin Media, said:
"I am pleased to report strong consumer on-net revenue growth and record ARPU during another quarter of solid financial performance. Our strong free cash flow is underpinned by good cost control and a high quality customer base. This reflects the success we have had in delivering and monetizing a compelling and highly competitive consumer proposition which exploits our strengths in broadband and video-on-demand. The growth outlook for the second half of the year remains strong.
"We have now reached a landmark milestone with the completion of our next generation network, which successfully demonstrates our drive to redefine the high-speed broadband market in the UK. More than 12 million homes now have access to 50Mb broadband, the fastest commercially available product in the UK, and we continue to innovate with our customer pilot of 200Mb.
"Our successful bond issues, over the last few months, reflect the market's confidence in our business and growth prospects. We believe we remain well-positioned to meet the wider economic challenges and to continue to provide our customers with more reasons to choose Virgin Media."
Conference call details
There will be a webcast and conference call for analysts and investors today at 8am ET / 1pm UK time.
The presentation can be accessed live via webcast on the Company's website, www.virginmedia.com/investors.
Analysts and investors can dial in to the presentation by calling +1 866 966 5335 in the United States or +44 (0) 20 3023 4472 for international access, passcode "Virgin Media Inc." for all participants.
The teleconference replay will be available for one week beginning approximately two hours after the end of the call until Thursday, August 13, 2009. The dial-in replay number for the US is: +1 866 583 1035 and the international dial-in replay number is: +44 (0)20 8196 1998, passcode: 499513#.
Forward-looking statements
This release contains certain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Please refer to "Safe Harbor Statement under the U.S. Private Securities Litigation Reform Act of 1995" on page 11 for a more detailed discussion regarding these forward-looking statements.
SUMMARY FINANCIAL RESULTS (unaudited)
-------------------------------------
Q2 2009 Q1 2009 Q2 2008
-------- -------- --------
GBP m GBP m GBP m
(adjusted)
(1)
Revenue
On-net 616.8 604.0 595.5
Mobile 127.5 135.3 143.9
Off-net (National) 13.3 14.0 15.6
-------- -------- --------
Consumer segment - Total 757.6 753.3 755.0
Business segment 142.5 149.8 156.8
Content segment 35.7 32.6 28.3
-------- -------- --------
Total Revenue 935.8 935.7 940.1
OCF(2) 333.8 312.3 334.3
FCF(2) 85.3 62.2 110.5
Operating income (loss)(3) 15.2 13.0 (328.3)
Net cash provided by operating activities 235.5 129.2 273.6
CONSUMER OPERATIONS STATISTICS ('000s) Q2 2009 Q1 2009 Q2 2008
-------------------------------------- -------- -------- --------
Consumer RGUs
Television 3,672.0 3,651.6 3,538.8
Digital TV 3,543.3 3,510.4 3,353.5
Broadband
On-net 3,735.2 3,730.1 3,563.4
Off-net 245.7 247.0 272.7
-------- -------- --------
3,980.9 3,977.1 3,836.1
Telephone
On-net 4,104.0 4,108.3 4,063.5
Off-net 112.5 109.0 107.3
-------- -------- --------
4,216.5 4,217.3 4,170.8
Mobile(4)
Contract 784.6 712.3 491.6
-------- -------- --------
Total Consumer RGUs 12,654.0 12,558.3 12,037.3
======== ======== ========
Net Consumer RGU adds
Television 20.4 30.6 24.8
Digital TV 32.9 41.4 42.1
Broadband
On-net 5.1 47.3 54.6
Off-net (1.3) (5.0) (6.8)
-------- -------- --------
3.8 42.3 47.8
Telephone
On-net (4.3) 9.1 3.4
Off-net 3.5 3.5 4.9
-------- -------- --------
(0.8) 12.6 8.3
Mobile(4)
Contract 72.3 62.9 55.9
Data cleanse -- -- 5.3
-------- -------- --------
Total Net Consumer RGU adds in period 95.7 148.4 142.1
======== ======== ========
Notes
(1) Prior period results have been adjusted to reflect the treatment
of our former Sit-up business as discontinued operations and the
reorganization of our reporting segments.
(2) OCF and FCF are non-GAAP financial measures. Please see Appendix F
for a reconciliation of non-GAAP financial measures to their
nearest GAAP equivalents.
(3) Operating loss in Q2 2008 was impacted by a goodwill impairment
charge of GBP 366.2m.
(4) The operating statistics relating to prepay mobile are included
within Mobile Operations Statistics, as described elsewhere in
this earnings release.
OVERVIEW
We achieved significant consumer on-net revenue growth in the quarter driven by record high on-net ARPU, which has fed into strong sequential OCF and FCF growth. These results reflect our focus on attracting and retaining higher value customers and monetizing our capital investment, particularly in our broadband speed upgrades. We expect ARPU and on-net revenue growth to continue in the second half of the year, underpinning further OCF growth.
We continue to prudently manage our debt structure, recently completing two successful bond issues, which have allowed us to repay approximately GBP 1bn under our senior credit facility in June and July.
We are investigating the benefits of obtaining a secondary listing on the London Stock Exchange, as such a listing would provide a further means for UK and European investors to trade the Company's shares on a well-established local platform and assist in raising the Company's corporate profile in the UK, where its business is conducted. If we were to proceed with a secondary listing, the Company's primary listing would remain on NASDAQ and we do not intend to issue any new equity capital in conjunction with it. Any such listing remains subject to approval from the regulatory authority and our Board of Directors. We will provide further updates to the market as appropriate.
In broadband, we have achieved a significant improvement in our tier mix, which together with related price increases, is driving on-net ARPU growth. This also reflects growing consumer appetite for faster broadband speeds and demonstrates that Virgin Media continues to lead and define the developing market for high-speed broadband. We are in the process of upgrading our 2Mb customers to 10Mb. Ahead of schedule, we have completed the roll-out of our ultrafast 50Mb product and more than 12 million homes throughout the UK now have access to our next generation broadband services. The aggregate headline speed of our customer base has grown by 47% in the last twelve months and will continue to grow, driving both revenue growth and our competitive advantage. We continue to look ahead to see how we can further develop our high-speed network and provide broadband services of the future for our customers -- our customer pilot of 200Mb is well underway.
In television, our market leading video-on-demand (VOD) service is being enjoyed by more of our customers more frequently, with 62 million views each month on average during the quarter. We also announced the launch of six new High Definition (HD) channels to complement our existing linear and popular on-demand line-up. We plan to launch more HD channels with a focus on content which benefits most from being shown in HD. We currently have around 300 hours of HD programming on our VOD service and are looking to secure more content of this nature.
We are successfully delivering on our strategy to expand our contract mobile base through targeted cross-sell to our on-net customers, competitive propositions and offering an attractive fixed data rate. We continue to work on exploiting mobile as the third screen and giving our customers a compelling content experience across platforms and are currently in negotiations to agree our first ever three screen rights deal so that customers can access the same content via TV, PC or mobile.
Our focus on bundling our cable and mobile products continues to help drive customer value, as reflected in much lower churn rates for bundled customers. The monthly churn rate for a quad-play customer is around 0.4% compared to around 0.9% for a triple-play and around 2.7% for a single product on-net customer. At the end of the quarter, we had around 450,000 quad-play customers.
During the quarter, we continued to grow the number of Virgin Media branded retail outlets. These provide effective and engaging touch points with prospective and existing customers, and we are looking to triple our retail presence this year, in key locations throughout the UK.
Second quarter RGU and customer growth was affected by seasonally higher churn and our focus on improved tier mix and price as reflected in our record ARPU performance and on-net revenue growth. In the third quarter we expect overall on-net customer growth, whilst maintaining our focus on growing on-net ARPU. Third quarter total RGU growth is expected to be at similar levels to those achieved in the third quarter of last year.
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2009
TOTAL REVENUE
Total revenue in the second quarter was GBP 935.8m (Q1-09: GBP 935.7m; Q2-08: GBP 940.1m). Revenue movements are discussed further below.
CONSUMER SEGMENT
On-net
On-net revenue in the second quarter was up 3.6% year-on-year at GBP 616.8m (Q1-09: GBP 604.0m; Q2-08: GBP 595.5m). This increase principally reflects the growth in on-net ARPU, which increased 3.8% year-on-year to GBP 43.27 (Q1-09: GBP 42.29; Q2-08: GBP 41.68) as a result of selective price rises and successful up-sell and cross-sell, partially offset by declining fixed line telephony usage.
Average monthly on-net churn remained stable year-on-year at 1.3% (Q1-09: 1.1%; Q2-08: 1.3%) and was up sequentially, partly for seasonal reasons due to higher end-of-term student churn and increased movers. Churn is expected to again be seasonally higher in the third quarter although to be flat or lower when compared to the third quarter last year.
Gross on-net customer additions in the second quarter were 159,500, down 5% on both the previous quarter and the same quarter last year. We believe the decline partly reflects our strategy of focusing on higher priced products and higher value customers, along with the continued impact of the soft macroeconomic environment. The 5% rate of year-on-year decline was lower than in the previous quarter which showed an 8% decline. As expected, the on-net customer base decreased to 4.74m at the quarter-end, with net disconnections of 26,200 in the quarter mainly due to the seasonal increase in churn.
Successful bundling and cross-sell was reflected in continued growth in triple-play penetration, which reached a record 58.3% at the quarter-end compared to 53.1% a year ago. The proportion of customers taking only one product fell to 15.3% compared to 17.7% a year ago.
Broadband
Broadband net additions were 5,100 (Q1-09: 47,300; Q2-08: 54,600). Net additions were down both sequentially and year-on-year due to lower gross additions and seasonally higher churn driven by students. We believe gross additions declined due to our shift in focus towards growth in higher speed (and higher ARPU) customers and lower growth in the overall broadband market, along with the impact of the soft macroeconomic environment. Nevertheless, we expect to increase overall broadband growth in the third quarter alongside the continued improvement in tier mix.
The increased focus on up-sell has improved the tier mix and the number of subscribers on our top two broadband tiers (20Mb and 50Mb) has increased by 37% to 454,400 in the last twelve months. We have begun upgrading our 2Mb customers to 10Mb and by the end of the quarter, 174,900 customers had been upgraded. At the quarter-end, 47% of our broadband customers subscribed to a 10Mb tier or higher. This has also resulted in a 47% increase in aggregate headline speed(1) of our customer base in the last twelve months to 26,358Mb/s.
(1) -- Aggregate headline speed is defined as broadband customers multiplied by the headline speed of each customer.
Television
Total TV net additions were 20,400 in the quarter (Q1-09: 30,600; Q2-08: 24,800).
Customers are increasingly using our VOD services. On a monthly basis, 1.9m of our digital TV customers use VOD, representing a reach of 55%. Average views per user per month in the quarter were 32.1 compared to 23.8 a year ago.
During the quarter, we added 56,600 V+ DVR subscribers to reach an installed base of 668,500. This represents a penetration level of just 19% of our digital subscribers which leaves significant further up-sell opportunities.
We have announced the launch of six new HD channels from Channel 4, ESPN, LIVING, FX, MTV and National Geographic. These will be available for free to all subscribers of our top basic TV tier "XL" with our V+ DVR and Channel 4 HD will be available to all digital TV subscribers along with BBC HD. We plan to launch more HD channels with a focus on content which most benefits from being shown in HD. In addition, recent proposals from Ofcom, the UK telecoms and media regulator, would enable us to offer our customers certain Sky Sports HD and Sky Movies HD channels, which BSkyB would be obliged to provide at a regulated wholesale price. The detail of this proposal is now under consultation.
Telephony
Telephony net disconnections for the quarter were 4,300 (Q1-09: 9,100 net adds; Q2-08: 3,400 net adds). Telephony growth was affected by the seasonal increase in churn. 53% of our telephony customers subscribe to one of our unmetered tiers (or Talk plans) compared to 51% a year earlier. Revenue from metered telephony usage (i.e. from those customers not on Talk plans) declined 8% as compared to the same quarter last year, partly due to a reduction in usage minutes and partly due to the increase in the percentage of unmetered customers. Overall outbound usage minutes declined 11% versus a year ago and had a negative impact on on-net ARPU. The rate of decline in fixed line telephony usage is in line with our expectations and as the only company in the UK to be offering a quad play offering, our exposure to this declining market is partly mitigated by our mobile business.
Mobile
Regulated changes to Mobile Termination Charges (MTC)
The level of MTC applicable for calls to UK Mobile Network Operators (MNOs) is subject to regulation. On April 2, 2009, the Competition Appeals Tribunal (CAT) ordered the regulator, Ofcom, to implement the Competition Commission's Determination on Mobile Termination Charges for the current Charge Control period (April 2007 to March 2011) which resulted in a reduction in the level that MNOs can charge for call termination on their networks over the period of the price control. Whilst not challenging the price control for April 2009 to March 2011, the four 2G/3G MNOs, Vodafone, T-Mobile, Orange and O2 have appealed the CAT's decision to order Ofcom to adopt a revised price control for the elapsed period (April 2007 to March 2009) to the Court of Appeal.
Consequently, from April 2009, our business is affected by these MTC changes which have had the impact in the quarter of reducing Virgin Media's inbound mobile voice revenue and reducing Consumer and Business cost of sales collectively by a similar amount. Therefore, there is no overall effect on Group OCF or operating income. We expect broadly the same impact in both of the remaining quarters of this year.
Mobile revenue
Mobile revenue in the quarter was GBP 127.5m (Q1-09: GBP 135.3m; Q2-08: GBP 143.9m). The decline reflects the impact of the MTC reduction and the expected reduction in low lifetime value prepay subscribers being partially offset by growth in the number of higher lifetime value contract subscribers.
Contract net additions in the quarter were 72,300 (Q1-09: 62,900; Q2-08: 55,900) as we continued to execute our strategy of using our own sales channels and cross-selling mobile contracts to our on-net customers. At the quarter-end, we had 784,600 contract customers representing 24% of our total mobile customers, and growth of 60% in the last twelve months.
The rate of prepay net disconnections slowed in the quarter to 106,500 (Q1-09: 138,000; Q2-08: 151,600) on a 30-day basis. The decline reflected a highly competitive market and our decision not to focus on the lower end of the prepay market because this segment has higher churn, low tariffs and lower overall lifetime profitability.
Overall Mobile ARPU for the quarter was GBP 12.43 (Q1-09: GBP 13.14; Q2-08: GBP 13.34), down mainly due to the decline in revenue outlined above.
Off-net
Off-net revenue was GBP 13.3m (Q1-09: GBP 14.0m; Q2-08: GBP 15.6m) with the year-on-year reduction mainly due to a lower level of off-net broadband subscribers. At the quarter-end, we had 245,700 off-net broadband subscribers, with the decrease of 1,300 in the quarter mainly due to churn as a result of the highly competitive broadband DSL market. The number of off-net telephony subscribers increased by 3,500 net additions during the quarter and we now have a base of 112,500 telephony subscribers.
BUSINESS SEGMENT
Business revenue was GBP 142.5m (Q1-09: GBP 149.8m; Q2-08: GBP 156.8m). Business revenue declined year-on-year mainly due to the completion of a project at Heathrow Airport's Terminal 5 and declines in wholesale and voice revenues, partially offset by growth in data rental revenues. The sequential revenue decline was mainly due to declines in wholesale and voice revenues, partially offset by growth in data rental revenues.
Our strategy is to focus on growing data revenues to replace declining voice revenues. This has resulted in several new data contract wins, including Dorset Police, Renfrewshire Council, and Birmingham City Council. We were also recently selected as the preferred bidder for The Hampshire Partnership, which is an agreement between 16 local authorities.
Retail data revenue in the quarter was GBP 49.9m (Q1-09: GBP 51.3m; Q2-08: GBP 46.8m). Retail voice revenue was GBP 43.6m (Q1-09: GBP 46.6m; Q2-08: GBP 47.7m).
Local Area Network ("LAN") Solutions revenue in the quarter was GBP 9.5m (Q1-09: GBP 11.1m; Q2-08: GBP 17.5m). The year-on-year decline is mainly due to the completion of the contract for Terminal 5, which contributed no revenue in the second quarter compared to GBP 6.4m in the same quarter last year. However, this contract operated at a very low margin and, consequently, it does not have a significant impact on OCF.
Wholesale revenue in the quarter was GBP 39.5m (Q1-09: GBP 40.8m; Q2-08: GBP 44.8m). Revenue was down year-on-year mainly due to reduced customer traffic.
CONTENT SEGMENT
Content revenue, after inter segment elimination, was GBP 35.7m (Q1-09: GBP 32.6m; Q2-08: GBP 28.3m). VMtv sells TV channels to and receives subscriptions from the Consumer segment. As a result, for consolidation purposes, GBP 6.6m of inter segment revenue has been eliminated in the quarter.
VMtv revenue increased compared to the same quarter last year mainly due to growth in subscription revenue, partially offset by reduced advertising revenue. Revenue was up sequentially mainly due to higher subscription revenue.
Subscription revenue increased year-on-year due to the carriage agreement with BSkyB for continued and extended carriage of our VMtv channels on its satellite platform, effective from November 13, 2008, at higher rates than under the previous contract. Subscription revenue increased sequentially due to performance based payments resulting from strong viewing figures for our channels.
Advertising revenue was down due to macroeconomic related declines in the total TV advertising market. However, VMtv increased its share of the TV advertising market.
Content segment contribution was GBP 6.4m (Q1-09: GBP 6.9m; Q2-08: GBP 0.1m loss). The year-on-year improvement was mainly due to increased subscription revenue.
UKTV JOINT VENTURE
Virgin Media owns 50% of the companies that comprise UKTV, a group of joint ventures formed with BBC Worldwide. UKTV produces a portfolio of television channels based on the BBC's program library and other acquired programming which are carried on Virgin Media's cable platform and also on satellite. Some channels are also available on Freeview.
Virgin Media accounts for its interest in UKTV under the equity method and recognized a share of UKTV's net income of GBP 0.4m in the quarter (Q1-09: GBP 3.7m; Q2-08: GBP 5.0m). UKTV's financial results are not consolidated in Virgin Media's revenue, operating income or OCF.
UKTV is funded by loans from Virgin Media, which were GBP 139m at June 30, 2009. These loans effectively act as a revolving facility for UKTV. Virgin Media loaned a net GBP 0.5m to UKTV during the second quarter and received net repayments of GBP 0.7m in the year to date. Virgin Media also received cash payments from UKTV in the quarter totaling GBP 1.7m and GBP 3.0m in the year to date which consisted of dividends, interest payments and payments for consortium tax relief.
Virgin Media's investment in UKTV is carried on the balance sheet at June 30, 2009 at GBP 359m, which includes the outstanding loans of GBP 139m.
OPERATING COSTS AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
This quarter, we have included increased disclosure relating to operating costs and SG&A in Appendix C2.
Operating costs (exclusive of depreciation and amortization) were GBP 404.6m in the quarter (Q1-09: GBP 413.7m; Q2-08: GBP 397.0m).
Total gross margin(1) in the quarter was 56.8% (Q1-09: 55.8%; Q2-08: 57.8%). This increased sequentially mainly due to increased Consumer gross margin(2) resulting from price increases. Total gross margin declined year-on-year mainly due to lower Consumer gross margin as a result of the reduction in higher margin prepay mobile subscribers and the increase in lower margin contract mobile subscribers, partially offset by increased on-net revenue.
(1) Total gross margin is defined as total revenue less total operating costs, divided by total revenue.
(2) Consumer gross margin is defined as consumer revenue less consumer cost of sales, divided by consumer revenue.
SG&A was GBP 197.4m in the quarter (Q1-09: GBP 209.7m; Q2-08: GBP 208.8m). SG&A was down mainly due to lower employee and outsourcing costs and reduced other costs.
Cost saving program
In November 2008, we announced important steps to re-engineer our business and create a fully-integrated, customer-focused organization, driving further improvements in operational performance and eliminating inefficiencies. This program remains on track to achieve the target savings.
During the second quarter, we incurred GBP 2.8m in SG&A and operating costs (Q1-09: GBP 2.9m; Q2-08: GBP nil) and GBP 22.2m in restructuring and other charges (Q1-09: GBP 9.9m; Q2-08 GBP nil) in relation to this program. These restructuring and other charges consisted mostly of vacant property charges and employee redundancy expense. In 2009, we expect to incur between GBP 15m and GBP 25m in SG&A and operating costs and between GBP 40m and GBP 50m of restructuring and other charges relating to this cost saving program. We plan to spend less SG&A and operating costs on this program in 2009 than previously indicated as we plan to secure more of the efficiency savings without the use of third parties, therefore requiring fewer consultancy and outsourcing costs. We plan to incur higher restructuring and other charges in 2009 than previously indicated mainly due to increased levels of vacant property charges.
OPERATING INCOME BEFORE DEPRECIATION, AMORTIZATION, GOODWILL AND INTANGIBLE ASSET IMPAIRMENTS AND RESTRUCTURING AND OTHER CHARGES (OCF)
OCF was GBP 333.8m in the quarter (Q1-09: GBP 312.3m; Q2-08: GBP 334.3m). The sequential increase was mainly due to increased revenue and reduced SG&A.
OCF as a percentage of revenue (OCF margin) was 35.7% (Q1-09: 33.4%; Q2-08: 35.6%).
OCF is a non-GAAP financial measure. See Appendix F for reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.
OPERATING INCOME / LOSS
Restructuring and other charges of GBP 23.6m were incurred during the quarter (Q1-09: GBP 5.4m; Q2-08: GBP 1.7m credit) mainly resulting from the cost saving program initiated in 2008.
Depreciation expense was GBP 233.9m (Q1-09: GBP 232.7m; Q2-08: GBP 229.6m). Amortization expense was GBP 61.1m (Q1-09: GBP 61.2m; Q2-08: GBP 68.5m) with the year-on-year decline due to the cessation of amortization of certain intangible assets that became fully amortized during 2008.
Operating income was GBP 15.2m (Q1-09: GBP 13.0m; Q2-08: GBP 328.3m loss) with the year-on-year improvement reflecting the absence of any goodwill and intangible asset impairment charge in contrast to the same quarter last year. Operating income as a percentage of revenue was 1.6% (Q1-09: 1.4%; Q2-08: negative).
NET LOSS FROM CONTINUING OPERATIONS
Net loss from continuing operations was GBP 47.6m (Q1-09: GBP 132.9m; Q2-08: GBP 444.5m). The sequential improvement was mainly due to increased foreign currency gains partially offset by increased losses on derivative instruments which mainly resulted from movements in the sterling to U.S. dollar exchange rate. The year-on-year improvement is mainly due to the absence of any goodwill and intangible asset impairment charge being incurred this quarter in contrast to the same quarter last year.
CAPITAL EXPENDITURE
Fixed asset additions (accrual basis) were GBP 142.9m for the quarter (Q1-09: GBP 157.0m; Q2-08: GBP 155.0m), down year-on-year mainly due to reduced expenditure on consumer premise equipment and commercial equipment, partially offset by increased scaleable infrastructure costs.
The total purchase of fixed assets and intangible assets was GBP 148.2m in the second quarter (Q1-09: GBP 144.4m; Q2-08: GBP 107.6m) with the year-on-year increase mainly due to the timing of payments to fixed asset suppliers and less use of capital leases.
Fixed asset additions (accrual basis) is a non-GAAP financial measure. See Appendix F for reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.
FREE CASH FLOW
Free Cash Flow was GBP 85.3m (Q1-09: GBP 62.2m; Q2-08: GBP 110.5m). The sequential increase is mainly due to increased OCF. The year-on-year decline is mainly due to higher purchase of fixed assets and intangible assets, partially offset by reduced net interest expense. Net cash provided by operating activities was GBP 235.5m (Q1-09: GBP 129.2m; Q2-08: GBP 273.6m).
Free Cash Flow is a non-GAAP financial measure. See Appendix F for reconciliations of non-GAAP financial measures to their nearest GAAP equivalents.
DEBT
As of June 30, 2009, long term debt, net of GBP 39m current portion, was GBP 5,859m. Total debt consisted of GBP 3,498m outstanding under our Senior Credit Facility, GBP 1,742m of Senior Notes, GBP 490m of Convertible Senior Notes and GBP 168m of capital leases and other indebtedness.
